Kerr v Simpson Dowsett Mackie Lawyers Nominee Company Limited
[2020] NZHC 2524
•9 September 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-343
[2020] NZHC 2524
BETWEEN ELIZABETH ANNE KERR
Plaintiff
AND
SIMPSON DOWSETT MACKIE LAWYERS NOMINEE COMPANY LIMITED
First Defendant
PERFORMANCE TRUSTEES LIMITED
Second Defendant
Hearing: 9 September 2020 Appearances:
Neil King for the Plaintiff
Grant Collecutt for the Defendants
Judgment:
9 September 2020
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Sinisi Law, Otahuhu, Auckland, for the Plaintiff
Simpson Dowsett Mackie, Auckland, for the Defendants
Copy for:
Neil King, Barrister, Auckland, for the Plaintiff
Grant Collecutt, Barrister, Auckland, for the Defendants
KERR v SIMPSON DOWSETT MACKIE LAWYERS NOMINEE COMPANY LIMITED [2020] NZHC 2524
[9 September 2020]
[1] Ms Kerr, as mortgagor, sues the defendant mortgagees under s 176 of the Property Law Act 2007 over the sale as mortgagees of properties at 130 and 172 Parker Road, Oratia, Auckland. The defendants have applied for security for costs under r 5.45 of the High Court Rules 2016.
[2] The defendants say that there is reason to believe that Ms Kerr will be unable to pay their costs if she loses and accordingly seek security. In applications under r 5.45 of the High Court Rules 2016, the court generally follows these steps:
[a]Has the applicant satisfied the court of the threshold under r 5.45(1)?
[b]Should the court exercise its discretion under r 5.45(2)?
[c]What amount should security be fixed at?
[d]Should a stay be ordered?
Ms Kerr’s claim
[3] Ms Kerr owned two properties at Parker Road, Oratia, no.130 described as Lot 3 DP367142 with an area of 7.739ha, and no.172, being Lot 1, DP53201 and Lot 1 DP61532 with 6.2810 ha. In October 2010, she granted a first mortgage over the properties to the first and second defendants as tenants-in-common. Simpson Dowsett Mackie Lawyers Nominee Company Ltd had a 325/600th interest and Performance Trustees Ltd had a 275/600th interest. The mortgage secured a loan for $600,000 which was repayable on 8 April 2012. The mortgage was not repaid on the due date. Penalty interest was charged at 18.95 per cent per annum on the unpaid balance. In October 2012, she also mortgaged the property to CityWide Capital Ltd for $7,700 for costs charged for due diligence by a new proposed mortgagor. The defendants sold the properties by auction on 1 March 2013 for
$880,000. Title was transferred on the 28 March 2013. She pleads that after
deducting costs and interest, there was a shortfall of $3,715.79. Marketing costs charged for the sale of the property were $2,839.39, but marketing was limited to a sign on the road and an advertisement in the local newspaper. On 11 February 2013, the properties were worth $1,265,000, assessed on the basis of a proposed subdivision. In August 2011, the properties had rating values of $1,650,000. The purchaser of 130 Parker Road re-sold the property in 2015 for $2.85 million with no improvements except a driveway.
[4] Under s 176 of the Property Law Act 2007, a mortgagee who exercises a power of sale to sell a mortgaged property owes a duty of reasonable care to the mortgagor to obtain the best price reasonably obtainable as at the time of sale. Ms Kerr says that the defendants breached that duty because:
[a]there was not marketing over a reasonably long period of time;
[b]there was not an extensive advertising and promotional campaign;
[c]the sale price cannot be reconciled with expert opinion as to value;
[d]the sale price was much less than the assessed value and
[e]there was no explanation for the discrepancy.
[5] Ms Kerr claims damages of $385,000, being the difference between the best price readily obtainable and the price the properties were sold for.
Is there reason to believe that Ms Kerr will be unable to pay the defendants costs if the plaintiff is unsuccessful?
[6] The defendants rely on circumstantial evidence. They estimate that the costs that Ms Kerr might be ordered to pay if the case goes to an all-defended hearing and she is unsuccessful will be in the order of $70,000. That includes an estimate of $15,000-$20,000 in fees for an expert witness. Ms Kerr, the defendants say, is 82 years old. They have got that date off a copy of her driver’s licence showing that she was born on 2 August 1937 (actually making her 83 now).
She was 75 when the properties in Park Road were sold. The defendants sold the properties because she did not make any payments under the mortgage. After the properties were sold, she did not receive any of the proceeds. As she could not meet the mortgage commitments and her only income is likely to be her national superannuation, it can be inferred that she does not have the means to pay a substantial order for costs.
[7] Ms Kerr has not given any evidence as to her financial position. It is submitted for her that no inference should be drawn from her failure to provide evidence as to her means.1 Reference was made to cases where impecuniosity had been inferred from the existence of a contingency fee arrangement, where the plaintiff had agreed to give other defendants security and where the plaintiff had been found impecunious in earlier proceedings. It was submitted that none of these situations arose here.
[8] In the absence of any evidence from Ms Kerr to the contrary, I infer from the defendants’ evidence that after the sale of the Parker Road properties in 2013, Ms Kerr’s only likely income has been her national superannuation, which is likely to be only enough to meet her day-to-day living costs. She is unlikely to have accumulated funds to meet a substantial order for costs. Accordingly, any order for costs made against her if she loses the case is likely to be barren. The defendants have established the threshold.
Exercise of the discretion
[9] The court balances competing interests – the defendants’ interest in being protected from a barren costs order, and the plaintiff’s right of access to the court. To do that, the court makes an assessment of the strength of the plaintiff’s case. Necessarily, that is a matter of impression. For this case, the parties have indicated generally what the case is about and, quite properly, have not provided full detailed briefs of evidence.
1 Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430 (HC).
[10] As to claims under s 176 of the Property Law Act 2007, case law establishes the following propositions:2
1Section 176 of the Property Law Act 2007 codifies the duty which, under the general law, a mortgagee exercising a power of sale will be taken to owe to the persons named in the section, including guarantors.
2The duty of care is concerned with obtaining the best price reasonably obtainable as at the time of sale. It is a duty to take reasonable care. It does not necessarily follow that the best price reasonably obtainable will be achieved.
3The duty has to be measured at the time of sale. The duty arises at the time that the decision to sell is made. There is a need to analyse the steps taken once the decision to sell is made, up to the time of sale.
4The duty of care does not qualify the mortgagee’s right to decide if and when to sell.
5When deciding whether reasonable steps have been taken by the mortgagee to obtain the best price, the steps taken by the mortgagee and those acting for it must be looked at in the round. The issue is a commercial one to be viewed in practical commercial terms.
6Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon specialised advice as to the method of sale. Appointing a competent agent to sell does not discharge the mortgagee’s duties, but since its duty is ultimately only one of reasonable care, putting the matter in the hands of a competent agent will usually go a long way towards discharging the mortgagee’s duties.
7In the normal course, the proposed sale will need to be advertised with adequate description of the property’s attributes and within reason while wanting to attract all possible purchasers. In some cases this will need to extend to both general and specialist publications.
8There is no obligation to postpone the sale in the hope of obtaining a better price later. Nor is there an obligation to break up the assets to sell in a piecemeal manner, if this can only be carried out over a substantial period or at a risk of loss.
9When assets are sold by tender or auction, a reasonable period must usually be allowed for purchasers to inspect the property and arrange finance before submitting bids.
10For a breach of duty to be actionable, there must be proof of damage.
11A mortgagee is under no obligation to improve the property or increase its value.
2 Southland Building Society v Austin [2012] NZHC 497 at [29].
12A mortgagee’s sale for a price less than the current market value assessed by valuers does not of itself establish a breach of duty although a large discrepancy may indicate a failure to take reasonable care.
13A mortgagee does not have any general duty to maintain a property prior to sale.
14Following the service of the Property Law Act notice, there is no duty on a mortgagee to keep a guarantor informed of sales activities.
15The mortgagee is not entitled to sell in a hasty way, at a knock-down price sufficient to pay the debt which, because of the speed of sale, leaves a lower price than could otherwise be obtained.
[11] It has been said that the following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:3
[a]The appointment of a reputable estate agent to market the property.
[b]Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
[c]Marketing over a reasonably long period of time.
[d]An extensive advertising and promotional campaign.
[e]A properly conducted auction.
[f]A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[12] Evidence proving these steps goes towards showing compliance with the duty under s 176. However, a warning must be given. While mortgagees such as banks, building societies, finance companies and solicitors’ nominee companies may follow these steps as a matter of routine, it is still necessary to check whether these steps are appropriate in the particular circumstances of the case.
3 Southland Building Society v Austin [2012] NZHC 497 at [30].
[13]The Parker Road properties were sold by auction on 1 March 2013 for
$880,000. The sale was by auction conducted by a licensed real estate agent. The agreement uses the “Particulars and Conditions of Sale of Real Estate by Auction” of the Real Estate Institute of New Zealand and the Auckland District Law Society, 4th edition, 2012. Some of the standard terms have been struck out. Further terms have been added. Importantly, the property was sold “as is where is”. Settlement of the sale was on 28 March 2013.
[14] The defendants have provided a copy of a report by a registered valuer dated 17 July 2012 for both properties. The valuation was provided for mortgage purposes. The valuation records that the properties had been given rating valuations –$1,050,000 for 130 Parker Road and $390,000 for 172 Parker Road as at 1 July 2011. The valuer considered that at July 2012 130 Parker Road was worth
$800,000 and 172 Parker Road was worth $200,000 - a total of $1,000,000. The valuations were inclusive of GST (if any). The report gave a mortgage recommendation of $100,000 for 172 Parker Road and $548,600 for 130 Parker Road. The valuer also gave an opinion as to “current forced sale price range”. I quote the report (this is on page 27 of the bundle):
The circumstances surrounding a forced sale usually involve the owner being under some form of duress or pressure, financial or otherwise, to sell the property, or a third party such as a receiver or mortgagee being in possession of the property.
Therefore a forced sale of a property may involve the following: An inadequate exposure to the market;
An unreasonably short period in which to achieve a sale; an inappropriate selling method;
A vendor with a primary objective of recouping a loan or secured amount rather than obtaining a market price;
Potential buyers being aware of the circumstances of the sale and the seller’s bargaining position;
Other unusual factors.
That means that a forced sale usually results in a discount below the market value.
[15]The valuer assessed the forced sale value for 130 Parker Road at
$640,000-$680,000, a discount of 15-20 per cent below the current market value, and the forced sale value for 172 Parker Road is assessed at $150,000-$160,000, a 20-25 per cent deduction from the current market value. The valuer also noted that there was a proposed subdivision of the property. The valuer considered the value of the property if a subdivision were carried out. He assessed the combined value at $1,050,000 (inclusive of GST). He established that by taking into account a notional gross realisation, and deducting the costs of carrying out the subdivision.
[16] The property was marketed by Ray White Western Realty Ltd based in Glen Eden. Glen Eden has a commercial centre which generally services the Oratia area. The defendants’ evidence includes a report from the land agent on the marketing of the property. The agent reported that there had been advertising in the “Western Homes publication” and in The New Zealand Herald. It had also been advertised on the internet: Trade Me, RayWhite.com and realestate.co.nz. Open homes had been held. The agent had made follow-up calls to those who had expressed an interest in the property. The report named eight potential purchasers who had shown genuine interest in buying the property. The agent said the feed- back was that buyers were interested in buying at the $750,000 level. The agent was confident that that figure could be exceeded at the auction.
[17] The defendants’ evidence does not state exactly when marketing began. However, a marketing calendar shows marketing beginning on 31 January 2013 and ending with the auction on 5 March 2013. The report from the land agent can be taken as evidence showing proper efforts to market the property and engender interest in buying it. The marketing plan provides for a sign-board to be erected on the property, with the agents to market the property at their own sales meetings and to have open homes on six days (over three weekends). The defendants say that they have a DVD of the auction, which shows that a significant number of people attended the auction and there were many bidders for the property. With this, the defendants say that the property was properly marketed in accordance with the recommendations of an experienced real estate agent. The overall activity and interest in the property was very good. A significant of people attended the auction
and there were many bidders. The property was sold at a price within the forced sale range assessed by the registered valuer the year before.
[18] In response, Ms Kerr has relied on the rating valuations in July 2011, giving the properties a combined rating value of $1,440,000. She has also provided a report by a registered valuer dated 11 February 2013 with a valuation as at 7 February 2013. It assesses the market value of the property at $1,265,000 including GST. The valuer considers that the most likely purchaser will be a developer who obtains a resource consent to carry out the subdivision and sells the lots at a profit. Accordingly, he assesses the value on the basis of a subdivision of the properties. The report does not say what the property would sell for to someone who was not interested in development by subdivision. Nor does the valuer give consider what the property would sell for on a forced sale basis.
[19] Ms Kerr contends that the marketing of the property was limited and local. She alleges that the sale by auction was a fire sale for a quick commission to recover the amount due under the mortgage without trying for anything more. She contends that the defendants’ DVD shows people only interested in trying to buy the property below value. She believes that if the reserve were higher the properties may have sold or may have been passed in but sold for a higher price after the auction. She also notes that one of the properties was later sold in 2016 for $2.85m with very little in the way of improvements. She has attached an appraisal by another land agent suggesting a possible market value of
$1.5m-$1.6m.
[20] In reply evidence, the defendants note the difficulties in obtaining a subdivision consent for the Parker Road properties.
[21] In her statement of claim, Ms Kerr’s complaint is that there was not marketing over a reasonably long period of time; there was not an extensive advertising or promotional campaign and the sale price cannot be reconciled with expert opinion as to values. To a certain extent she relies on the discrepancy between the valuations and the actual sale price to contend that reasonable care was not taken.
[22] My assessment is that the defendants appear to have taken conventional steps to market the property. If the land agent gives evidence in terms of his report, there would appear to be fairly good evidence that the defendants did take proper steps to market the property, allowing enough time to generate interest, and that led to a successful auction. It needs to be borne in mind that the defendants would have been motivated to obtain a successful sale as they would want to avoid a short-fall. Ms Kerr’s complaint is that they tried enough to clear their own mortgage debt but did not try any harder.
[23] It is necessary to sound a note of realism. It invariably happens that mortgagee sales achieve less than sales negotiated freely on the open market. The global financial crash was marked by a number of cases of mortgagees suffering shortfalls on mortgagees’ sales - for example, see Southland Building Society v Austin.4 This case seems typical of that general run of cases. Mortgagors are invariably disappointed that properties do not sell at market value but it is one of the unfortunate facts of life that a mortgagee sale is unlikely to achieve market value.
[24] At this stage, I have not heard all the evidence and it may happen that the defendants’ case is not as strong as they make out. But my present impression is that in taking the steps that are ordinarily expected, a finding of breach of duty under s 176 is unlikely. At this stage I assess the odds as against Ms Kerr in being able to establish a breach of duty under s 176.
[25] I mention two matters which I do not consider relevant to the assessment of the merits.
[26] First, the defendants will say that they have a limitation defence. The relevant limitation provision is s 11(1) of the Limitation Act 2010:
11(1) It is a defence to a money claim if the defendant proves that the date on which the claim was filed is at least six years after the date of the act or omission on which the claim is based (the claim’s primary period).
4 Southland Building Society v Austin [2012] NZHC 497.
[27] The relevant act or omission is the agreement for sale and purchase of the property on 1 March 2013. That was an unconditional agreement. The defendants entered into it in the exercise of their powers under the mortgage. By entering into the agreement they had to make sure that they complied with their duty under s 176 of the Property Law Act. That meant that they had to take steps before entering into the agreement to comply with the duty, but it is the making of the agreement that constitutes the exercise of the power of sale that could potentially give rise to liability. Ms Kerr began this proceeding on 27 February 2019. At that date the six years had not expired. The proceeding therefore appears to be within time.
[28] For completeness, it is also arguable for Ms Kerr that time did not start to run until settlement of the sale. I do not have to consider that point because the agreement to sell was in any event within time.
[29] The other aspect is that Ms Kerr has made some play of the terms of the mortgage. She says that while $600,000 was borrowed, $80,550 was immediately applied towards interest up front, and there was a further payment of $12,000 as an establishment fee and $6,000 for brokers’ fees. She points out that on the sale of the property $726,148.42 went towards repayment of the mortgage. That is, there was $126,148.42 applied to interest that had accrued. The point here is that she does not appear to have made any payments under the mortgage at all. She was charged default interest of 18.95 per cent. However, the terms of the mortgage are irrelevant for this proceeding. She was dealing with a second-tier lender, and she did default under the mortgage. The normal consequences flowed. She is out of time to seek relief under the Credit Contracts and Consumer Finance Act 2003.5
[30] I accept the defendants’ submission that this is not a case where they brought about Ms Kerr’s impecuniosity. They point out that it was her failure to meet the outgoings on the mortgage which led to the mortgagee sale.
[31] The court must always be wary of barring access to the court by setting security for costs at a prohibitive level. Nevertheless, at this stage the strength of the defendants’ case is such that they are entitled to protection from a barren order
5 Credit Contracts and Consumer Finance Act 2003, s 121.
for costs. That is a protection against being sued on a weak case where they are put to substantial costs to defend it. Accordingly, I will order security.
Amount of security
[32] On the other hand, the amount should not be prohibitive. It should still be substantial. There is no single right figure or formula for setting security. In the circumstances of this case, the sum of $20,000 is adequate to meet the circumstances.
[33] I fix the security at $20,000. That is to be paid by 30 October 2020. If it is not paid then, this proceeding will be stayed. If security has not been paid by 30 April 2021, the defendants may apply for strike-out. That does not mean that the proceeding will be struck out. Instead, it will be for the court hearing the application to decide whether to extend the stay notwithstanding the failure to pay the security.
[34]The defendants will have costs on this application.
…………………………………
Associate Judge R M Bell
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